Substantial property transactions—Granada Group Limited v The Law Debenture Pension Trust Corporation Plc

In this case the Court of Appeal considered the legality of the pensions arrangement for former directors of a company, in particular, whether the directors’ membership of a secured unfunded unapproved occupational pension scheme amounted to the acquisition of a non-cash asset for the purposes of section 320 Companies Act 1985 (CA 1985) (whose successor is now to be found in section 190 of the Companies Act 2006 (CA 2006)). The case raises some interesting issues regarding how definitions of 'non-cash asset', 'interest' and 'connected person' can be construed for the purposes of CA 1985, s 320.

Introduction and facts

Granada Group Limited v The Law Debenture Pension Trust Corporation Plc [2016] EWCA Civ 1289

The appeal concerned the legality of pension arrangements for former directors of Granada Group Ltd (Granada). In the High Court, Andrews J held that the arrangements were lawful. Her judgment is at [2015] EWHC 1499 (Ch), [2015] Bus LR 1119. With the permission of Arden LJ, Granada appealed the decision.

In this case the Court of Appeal considered the legality of the pensions arrangement for former directors of a company, in particular, whether the directors’ membership of a secured unfunded unapproved occupational pension scheme amounted to the acquisition of a non-cash asset for the purposes of CA 1985, s 320 (whose successor is now to be found in CA 2006, s 190). The case raises some interesting issues regarding how definitions of 'non-cash asset', 'interest' and 'connected person' can be construed for the purposes of CA 1985, s 320.

What was the background to the case?

Granada had an occupational pension scheme for all its employees, (the Granada Pension Scheme) which was approved by HMRC so as to qualify for tax relief on contributions, investments and benefits. However, the Finance Act 1989 introduced an earnings cap limiting the total amount of pensionable earnings which could be taken into account in calculating the benefits payable to members joining such schemes after 1 June 1989. After those changes were introduced, Granada resolved to continue to provide new senior employees and directors with pensions based upon their full salary, so that they would not be disadvantaged in comparison with colleagues who had joined the Granada Pension Scheme before 1 June 1989. In order to do so, Granada, as employer, entered into 'top up' arrangements to provide the benefits, which operated outside the regime of HMRC approval. This involved Granada contracting with the director in question to 'top up' the relevant member's benefits from the approved Granada Pension Scheme, but without making contributions into a trust fund which would accumulate and provide the source of those additional payments in due course. Such arrangements could be provided on a funded or an unfunded basis; Granada chose to go down the unfunded route. This meant that, Granada would have to find the money from its own resources when the time came. The agreement to this effect was contained in a contract made between Granada and each individual director.

On 11 May 2000, Granada's non-executive directors resolved that security should be granted in support of the 'top up' contractual arrangements that had already been made by Granada in favour of its executive directors (the directors). On 23 May 2000, an actuarial report was obtained which valued the prospective or contingent benefits payable to the directors under the existing contractual arrangements collectively at £18,850,000.

The Granada Pension Scheme is governed by the following documents, which are all dated 23 August 2000:

  1. letters sent to each of the directors by Granada
  2. the Trust Deed and Rules (as amended) made between Granada and The Law Debenture Pension Trust Corporation Plc (as trustee) (the Trustee), and
  3. the Charge Deed (the Charge), by which Granada granted the Trustee a first fixed equitable charge over certain gilts, which Granada had acquired two days earlier

The assets over which the Charge was granted consisted of gilts and the Charge secured the amounts payable by Granada under the Granada Pension Scheme.

Under the terms of the Trust Deed, recital (C) stated that 'The Trustee has agreed to be the first trustee of the Scheme', clause 1.1 provided that the Granada Pension Scheme was governed by the Trust Deed and the Rules, at clause 2.1 the Trustee undertook 'to manage and administer the Granada Pension Scheme in accordance with...the…Deed and the Rules', at clause 2.2 Granada undertook with the Trustee '(such undertaking to be held on trust)' to pay the benefits to members in accordance with the Rules of the Granada Pension Scheme, clause 3.1 gave the Trustee power to require Granada to provide security in accordance with Rule 6 of the Rules, clause 5 contained indemnities in the Trustee's favour and clause 8 provided for what would happen if the Granada Pension Scheme terminated (in effect because Granada had become unable or unwilling to pay the benefits for which the Granada Pension Scheme provided). In that event the Trustee was required to realise the security and, after payment of certain costs, provide the requisite benefits to members.

The Granada Pension Scheme was administered in accordance with these documents for 13 years. From time to time, as actuarial values changed, Granada provided additional security as required by the Charge. In 2013, however, Granada alleged that the Charge was liable to be set aside because it contravened CA 1985, s 320. At the date of the appeal, the gilts to which the Charge apply were worth over £40m.

What were the key issues in the case?

There were two key issues in the case:

  1. Did the directors acquire a 'non-cash asset' in contravention of CA 1985, s 320? If so, then the Charge was liable to be set aside as it would contravene the prohibition under CA 1985, s 320
  2. Was the Trustee acting in its capacity as trustee under a pension scheme? If not, it was a person 'connected with' the directors for the purposes of CA 1985, s 320, and the Charge would count as a relevant 'non-cash asset', the acquisition of which by a director or a 'person connected with a such a director', was prohibited by CA 1985, s 320 (succeeded by CA 2006, s 190).

Did the directors acquire a 'non cash asset' for the purposes of CA 1985, s 320?

The Court of Appeal considered the meaning of 'non-cash asset' under CA 1985, s 320. CA 1985, s 320 provided:

'With the exceptions provided by the section next following, a company shall not enter into an arrangement—(a) whereby a director of the company…or a person connected with such a director, acquires or is to acquire one or more non-cash assets of the requisite value from the company…unless the arrangement is first approved by a resolution of the company in general meeting. For this purpose a non-cash asset is of the requisite value if at the time the arrangement in question is entered into its value…exceeds £100,000.'

A 'non-cash asset' was defined by CA 1985, s 739 as 'any property or interest in property other than cash and for this purpose 'cash' includes foreign currency' (whose successor is now to be found in CA 2006 s 1163).

The expression 'connected person' was defined by CA 1985, s 346(2)(c) and provided that:

'A person is connected with a director of a company if, but only if, he…is: (c) a person acting in his capacity as trustee of any trust the beneficiaries of which include (i) the director, his spouse or civil partner or any children or step-children of his…'

CA 1985, s 346(3)(b) provided that CA 1985, s 346(2)(c) did not apply to 'a person acting in his capacity as trustee under an employees' share scheme or a pension scheme'.

In her High Court decision Andrews J held that, the directors did not acquire any property or interest in property in the gilts themselves. All that they had was a right to compel the Trustee to administer the trust and that was no more than a personal right against the Trustee. That right had no effect on Granada's ability to use and enjoy its assets. Any right of that kind was a right held by the Trustee; not by the directors. So far as the directors were concerned, any benefits to which they were entitled under the Granada Pension Scheme were cash benefits, paid either from Granada's own resources or from the proceeds of realisation by the Trustee of the assets secured by the Charge. Andrews J further held that the Trustee was acting as the trustee of a pension scheme; and hence the 'connected person' provision under CA 1985, s 346(2)(c) did not apply to it. Finally, she held that under the terms of the Trust Deed the Trustee was entitled to be indemnified by Granada against the cost of the proceedings.

In its appeal, Granada challenged the judgment in the High Court and argued that the 'arrangement' in play for the purposes of CA 1985, s 320 consisted of the Charge, rule 6 of the Rules, and the actual security interest over the gilts that was created when the arrangement was entered into. Granada further argued that under the arrangement the directors acquired a 'non-cash asset' because of their status as beneficiaries under the Trust in the form of Granada's covenant to pay the benefits and to provide security and their entitlement to compel the Trustee to enforce those covenants. Granada acknowledged that although the directors did not have a legal or equitable proprietary interest in the gilts or the Charge, the word 'interest' in CA 1985, s 320 was broad enough to encompass any economic or financial interest or advantage. Finally, Granada argued that the charging of the gilts by Granada was intended to confer an advantage on the directors which was enough to constitute an interest.

The Court of Appeal dismissed these arguments commenting that:

  1. with reference to the decisions of the House of Lords in Coutts & Co v IRC [1953] AC 267 and Lord Reid's observations in Gartside v IRC [1968] AC 553, in order to determine whether the directors had a non-cash asset, the meaning of the phrase 'interest in property' must be inferred from the context. In the context of this case, Granada's argument focused too narrowly on the single word 'interest', without regard to the context in which it appears. It first appears in CA 1985, s 739(1) as part of the phrase 'property or an interest in property'. In that context, an 'interest in property' means a proprietary interest (ie a legal or equitable estate in real property that is legally recognisable and enforceable, amounting to a right). The rights of the directors under the Trust Deed to compel the Trustee to perform the trust were personal rights against the Trustee, which the directors acquired as beneficiaries under the trust and from their admission as members of the Granada Pension Scheme, not rights from the Company or rights over the assets of the trust (ie the gilts), and therefore, such rights did not fall within the meaning of a 'non-cash asset' which amounts to an 'interest in property', and
  2. Granada's fall-back position that the directors had 'rights over' the gilts or the Charge (ie that they had the right to affect both the exercise of the remedies conferred by the Charge as well as Granada's right to deal with the gilts) in the shape of their ability, through the intervention of equity, to compel the Trustee to fulfil its fiduciary obligation to administer the trust was not applicable due to the extension of CA 1985, s 320 to a trustee for a director. Parliament has chosen a specific class of person who falls within the definition of 'connected person', and that must be taken to be the limit of relevant third parties, particularly since the definition of a connected person emphasises that a person is connected with a director 'if but only if' that person falls within the class. It is clear from CA 1985, s 346(3)(b) that Parliament intended that a pension trustee should be outside the scope of CA 1985, s 320. Granada's interpretation would frustrate that legislative intention

Was the Trustee acting as a trustee of a pension scheme?

Granada argued that the Trustee was no more than a security agent for the directors, whose pensions were to be paid by Granada itself rather than by the Trustee. As CA 1985 contains no definition of 'pension scheme', the Court of Appeal considered this point by construing the terms of the Trust Deed and the Rules.

The Court of Appeal dismissed Granada's argument on the basis that:

  1. clause 1 of the Trust Deed establishing the Granada Pension Scheme, expressly appointed the Trustee as first trustee of the Granada Pension Scheme and the Trustee accepted that appointment
  2. clause 2 contained the Trustee's undertaking to 'manage and administer' the Granada Pension scheme. The only obligation to pay was that given by Granada to the Trustee, and
  3. rule 6.1 of the Granada Pension Scheme itself required Granada to give security to the Trustee. The only capacity in which the Trustee could have been entitled to require and hold that security was as trustee of the Granada Pension Scheme

The Court of Appeal confirmed that Granada's primary obligation to pay the pensions was irrelevant as the purpose of the Charge was to provide a fund out of which the Trustee would be able to pay the beneficiaries of the Granada Pension Scheme in the event that Granada could not or would not do so.

Conclusion

The Court of Appeal dismissed Granada's appeal and upheld the High Court's decision that directors' membership of a secured unfunded unapproved occupational pension scheme did not amount to the acquisition by them of a non-cash asset for the purposes of CA 1985, s 320 and that the Trustee was entitled to an indemnity against its costs.

Application to CA 2006

Although many aspects of the judgement related to provisions under CA 1985, the principles are likely to be equally applicable to the equivalent provisions in CA 2006.

By Daniel Okusaga

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